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A lot of times if you’ve been doing something for a while, you tend to take things for granted.

I got a call from a prospective client, someone I’ve known for several years. They called to ask me a question that I just figured everybody knew.

It was such a basic question when it comes to my profession that, like I said, I just took for granted and thought that everybody knew how to do it. The question was,

“How do I buy stock or how do I invest into stocks?“

I came to the conclusion that if they didn’t know the answer, most likely a significant portion of the readers don’t as well, so I’m going to take a minute and address some of the different ways you can get started buying stocks.

Table of Contents

5 tips to get you started buying stock online

To give you some background on the person that called, they were in a 401K so they were investing for their retirement, but they never actually had gone out to invest into individual stocks.

There was a certain stock that they were hot on and thought that they could make some money on so they wanted to go buy it. I gave her a few different places that she could go to do her own research and buy the stock.

If you are itching to invest your money, make sure to check out our great reviews on different ways to invest such as our Motif Investing Review.

Pour Your Foundation

First, if you’re looking to buy stocks, make sure that you’ve got a foundation set. I always hate it when people call me and they want to start investing in individual stocks and yet they don’t have anything saved in retirement.

  • They don’t have a 401K.
  • They don’t have an IRA.
  • They don’t have anything.
  • They don’t have an emergency fund, yet they want to start investing and playing in the stock market.

That’s one of my biggest pet peeves. It’s like a house, right? With a house, you have to build a foundation first. You don’t start putting on the roof or start doing the inner accessories like the big screen TV and the couches before you have the framework or foundation down.

Make sure you have those in place first before you go out and start buying stocks. That’s my entry disclaimer, but I just wanted to get that out there first.

Buying Stocks Online

Now if you’re ready to start buying stocks and you feel comfortable doing this, you have a couple of different areas online you can go to. The first place you can go is any discount broker. Think Ally, and I’m sure there are countless others, but these places are good. For starters, they’re very, very inexpensive.

Sometimes you can open accounts and trade for free. Others, to execute the trade to actually buy the stock, you may pay as little as $4.95 on up to 15 bucks per trade. That’s pretty reasonable, especially if you’re only going to be doing a few trades here and there. Some of them, and I’m not familiar with all the rules, but they may charge you an annual fee if you don’t do a lot of trading.

Definitely read all the fine print and rules before you engage in buying stock from an online discount broker. If it’s something where you’re going to buy a few stocks here or there, that could be a viable option.

Buying Individual Stocks Through Computershare.com

Another option if you’re comfortable making the purchases online is to actually buy it through the company itself. One website that has a lot of arrangements with a lot of different companies is Computershare.

When I have clients that have a share of stock that they either inherited or it was given to them, quite often computershare.com is the custodian. They will have to call them to liquidate it or to find out how many shares they own. Computershare just seems to be a common hub for a lot of these different companies.

How I’ve recently had some more relationship with Computershare was I wanted to buy stock for my kids, not so much as an investment, but more of a keepsake. I wanted to buy a share, put my son’s name on it as in the form of a custodial account. They had the actual certificate, something we could frame and put it on the wall and have a keepsake. I was having difficulty trying to find a certain stock that I wanted to buy. Sure enough I went through Computershare and they had an arrangement with that company so I’ll be doing that soon.

Computershare has a relationship with a lot of those companies. You can go to computershare.com and follow their links. I think you go to investor’s center and from there you can see some of the companies that they have an arrangement for. I think it’s over 500 companies. I’d have to check the website just to double check, but that’s another venue that you can go. I think it’s maybe a $15 transaction charge, so once again very minimal cost to do it. It’s another good, do-it-yourself, online arena where you can go to buy individual stocks.

Buying Stocks Direct From the Issuing Company

You can sometimes buy stock directly from the issuing company, without using a service like Computershare. This is mainly available with large, well-established companies. You can find out if the company offers the service by contacting their investor services department, which you can usually find on the company website.

One of big advantages to this is that the companies typically don’t charge any transaction fees, so you can buy the stocks at cost. And some companies will even allow you to sell your shares back to the company.

DRIPs. Some companies even offer programs known as Dividend ReInvestment Plans, commonly known as DRIPs. When you participate in this plan, your dividends are automatically reinvested in buying additional shares of the company stock. This is a way to build a long term position in a company that you are committed to holding an investment position in for a very long time.

Mutual Funds and Exchange Traded Funds (ETFs)

If you want to invest in the stock market, but you aren’t comfortable doing it with individual stocks, you can invest in a large number of stocks with a single investment in a mutual fund or an ETF.

There are several advantages to investing in funds:

  • You don’t have to select individual stocks, the fund manager takes care of that for you
  • Each fund represents a diversified portfolio of stocks; this is important because holding a larger number of stocks is less risky than owning just one or two
  • Transaction costs are much lower when you buy through a fund than if you try to assemble a custom-made stock portfolio
  • Your only decision with funds is deciding when to buy, and when to sell; since you can trade funds easily, you can move in and out of your positions quickly
  • Funds come in a variety of types, in which you can invest either in the general market, or in various sectors, such as energy and healthcare

Yet another advantage to investing in funds is that you can buy and sell them just as easily as you can trade individual stocks. You can buy them through a discount brokerage firm, as listed above. But you can also buy them through mutual fund families, such as Vanguard and Fidelity. Those are two of the largest mutual fund companies, but there are dozens of others to choose from.

Fund Families. Buying direct through a fund company – sometimes referred to as a “fund family” – is often less expensive than buying through a discount brokerage firm. That’s because within the fund family there are typically no transaction costs.

Index Funds vs. Actively Managed Funds. There are two general types of funds to be aware of, index funds and actively managed funds. Index funds invest in established investment indexes, such as the S&P 500. Index funds are more typical for ETFs. Since they invest in an index, the individual securities within the portfolio are traded only when the composition of the index changes. Since that is a relatively rare event, index funds have very little stock turnover, which means that their investment expenses within the fund are very low.

Actively managed funds are typically mutual funds. They tend trade a lot more than index funds, and have higher investment expenses. For this reason, index funds often outperform actively managed funds, and are probably the better choice for most investors.

Load Fees. You should also be aware that funds sometimes charge what are known as “load fees”. These are one time fees that are built into the fund, and they generally range between 1% and 3% of the value of the fund you’re purchasing. They can be charged upfront (known as front end loads) or upon sale (backend loads), and sometimes both on some funds.

Loads are high, which is why you should favor no-load funds. Not only are they less expensive to buy, but you’ll feel more freedom to close out your position whenever you choose, if you are not concerned by how much money you paid upfront in order to buy the fund in the first place.

Robo Advisors

If you want to invest in the stock market, but you aren’t comfortable doing it with individual stocks, or if you are unsure as to which mutual funds or ETFs to buy, you have one more option. A group of online, automated investment platforms have developed in recent years, commonly known as robo advisors.

These are investment platforms that will manage your investment portfolio for you, and do so for a lot less than the 1% to 2% annual fees that human investment advisors charge. You set your allocation with the robo advisor – which they take care of for you – then your money is automatically managed and invested by the platform. You’re only responsibility is to fund your account.

There are now dozens of robo advisors available, but one of the most popular – and well-regarded – is full review of Betterment for more details.

The Mechanics of Buying Stocks With a Broker

Okay, if you still want to buy stocks and you’re not completely comfortable going online to do it, I don’t blame you. That can be intimidating for a lot of people. You have to open up an account online and send some money to some faceless operation.

The other option you have is you could go to a local investment house, local stockbroker and buy stock through them. Just so you know, by going that direction you’re probably going to pay more, considerably more, but at least you have a face of someone you can talk to. They can share their expertise of what you think is going to make you a lot of money, if it really is. Also, you have somebody that hopefully is going to educate you in having that foundation set.

All these different brokerage firms differ on their prices, but I have to think at minimum you’re going to be spending about $40 per transaction. So if you buy a certain number of shares it’s 40 bucks. If you sell again it’s another $40. That’s for a smaller amount transaction. The higher transaction you go, the more shares you buy, or the higher the share price is will then determine how much the commission is going to be.

Some of these firms as well, if you don’t trade frequently, are going to hit you with either a small account fee or an inactivity fee. Be conscious of that. It’s definitely not the cheapest direction to go. Typically, when I’m working with clients and if they want to do some stock trades or they have a younger relative or their kid that wants to buy shares of stock and that’s all they want to do, I usually will guide them to one of these online platforms if they are comfortable just to help save them a few bucks.

Those are some of the different options you have. If you want to buy stock, you can go online to one of the online discount brokers or go to computershare.com. If you’re not comfortable head to your local brokerage. Then, when you shop around I would maybe interview one or two different brokers just to see what would be the potential cost to do so. I would just say,

“Hey, how much would it cost to buy 100 shares of…..”

and just give them some stock, maybe the stock you’re interested in, just to see what it is and how much the fee is going to be. You want to make sure you know what you’re getting yourself into. Make sure you read the fine print before you proceed and make that initial investment.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Source: goodfinancialcents.com

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What Is Faith-Based Investing? – SmartAsset

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A foundational religious parable tells of two servants who invested their money in the marketplace and one who buried it in the ground. This story gives Christians lessons about serving God with their money and abilities. More broadly, faith-based investing means applying religious principles to investing. This approach makes it possible to accomplish good in the world and receive excellent investment returns. Here are the details.

SmartAsset can help you find a financial advisor to create a financial plan for your needs and goals.

What Is Faith-Based Investing?

Faith-based investing means investing according to the moral, ethical and social sensibilities that arise from your religious beliefs. As a result, faith-based investors – whether Christian, Muslim, Jewish, Hindu or any other faith – will steer clear of specific investments, even if they are lucrative. And they search for returns with companies aligning with their values.

For example, Catholic investors won’t put money into companies that produce nuclear weapons, firearms or landmines or that profit off embryonic stem cell research or abortifacients. Instead, they invest in companies that practice social responsibility and provide excellent conditions for workers.

How Faith-Based Investing Works?

Faith-based investing seeks high returns, just like other investment approaches. However, it balances this priority with following religious convictions. For instance, companies promoting fair, accessible housing and environmental health will attract faith-based investors. On the other hand, their dollars won’t go towards companies profiting from tobacco or gambling.

Generally, faith-based investing values caring for people and the planet. As a result, religious investors often prefer companies demonstrating concern about economic justice, corporate responsibility and environmental protection. That said, many religious sects have specific way of investing, examples of which are outlined below.

Type of Faith-Based Investing

Catholicism

The Roman Catholic church has a robust history of faith-based investing, starting with social and financial activism against South African apartheid in the 1960s. In addition, leadership developed the Catholic Framework for Economic Life, which consists of ten faith-based principles. For example, the framework promotes all people’s right to life essentials, such as food and shelter, and prioritizes the welfare of vulnerable populations.

In addition, Catholic investors won’t put money into companies that practice discrimination or stem-cell research. Furthermore, they avoid companies that profit from abortion, contraception, weapons sales or adult entertainment. To that end, Catholic Investment Services manages over $1 billion on behalf of the church.

Protestantism

Benjamin Franklin once said, “Remember that time is money.” Protestants have the reputation, at least historically, of taking this message to heart by working hard and living frugally. They see their accumulated wealth as a way to create good in the world. Like Catholics, Protestant investors generally value the environment, justice and human well-being.

For example, GuideStone Funds bases its values on the Bible and manages over $15 billion in assets. The company supports “the sanctity of life, family, stewardship and health and safety.”

Judaism

Jewish values vary widely, from the ultra-Orthodox to the Reform and Reconstructionist. However, there are a number of common elements to Jewish investing.  For example, the Talmud emphasizes giving and diversifying assets. These practices are foundational in the Jewish way of life, including investing.

Although there is no formal guidance for socially responsible investing in Judaism, the faith encourages caring for the poor and being wise with money. As a result, Jewish investors usually put money into environmental health, social justice and the country of Israel. There are also mutual funds that follow Jewish investment strategies, such as the iShares MSCI Israel ETF, which invests in Israeli equities.

Islam

Specific rules in Sharia law, also known as halal, govern the Islamic way of life and investing practices. Sharia law prohibits participation in specific industries, including alcohol, gambling, tobacco, pork products and pornography.

In addition, the religion doesn’t allow speculation, interest and debt. Muslim investors who want to invest according to their faith avoid companies that don’t adhere to these principles, as well as those with high levels of debt.

Sukuk bonds, which represent ownership in future or current assets but do not pay interest, are a popular investment option for Muslim investors. Amana mutual funds, offered by Saturna Capital, avoid interest-bearing securities and prioritize long-term equity investments to safeguard against inflation. The Iman Fund, established by Allied Asset Advisors in 2000, is another mutual fund that follows Sharia principles and invests only in halal investments.

How to Build a Successful Investment Strategy That Aligns with Your Faith

As the examples above demonstrate, it’s possible to follow your religious convictions and invest profitably. Here are the strategies to build a successful investment strategy with your faith as the foundation:

Identify Your Priorities

First, ask yourself what about your faith drives your investment approach. For example, you might be passionate about gun violence, gender equality or affordable housing. Once you know your values, you can tell what kind of assets are appealing.

Determine Your Investment Style

Next, your investment style is crucial to understand. Specifically, you might have a low-risk tolerance. In this case, it’s best to seek safe investments that fit your approach. In addition, you might prefer to manage your investments yourself or hire a trusted professional.

Consider Your Goals

Your investment goals will also shape your approach. For instance, starting a faith-based retirement portfolio at 25 means you’ll be investing for decades. On the other hand, starting a college fund for your 10-year-old means you’ll need to cash out in less than a decade. Therefore, your objectives are critical to remember as you choose investments.

Find a Fund That Fits

As mentioned above, numerous faith-based funds are available for religious investors. From Saturna Capital for Muslims to the Global S&P 500 Catholic Values ETF, a range of investment products can fit your faith preferences. A fund specific to your denomination is an excellent place to start.

Consult With a Financial Advisor

If you’re unsure how to start, a financial advisor can help you clarify your priorities and choose funds that fit your beliefs. For example, their knowledge of the stock market can lead you to a company with environmentally friendly practices or a faith-based stock portfolio.

Bottom Line

Faith-based investing is similar to conventional investing in that it seeks low costs and high yields. However, it also filters out specific investments that violate religious values. Your religious beliefs will drive your individual style of faith-based investing, so understanding your values is key to investing in a way that gives you peace and improves the world.

Tips for Faith-Based Investing

  • Faith-based investors face the same challenges as conventional investors: diversification, tax implications, management costs, etc. Fortunately, a financial advisor can offer valuable insight and guidance. Finding one doesn’t have to be hard.  SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now
  • If you’re a Christian who wants to apply your faith to finances, you can learn about biblically responsible investing.

Photo credit: © iStock/Hispanolistic , ©iStock/ FangXiaNuo, ©iStock/Kamonwan Wankaew

Ashley Kilroy
Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.

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Once a month, I meet up with some smart people in my neighborhood to drink coffee and try to stave off mental decline by talking about hard financial topics: macroeconomics, taxation, and sometimes even something useful, like investing. It’s like Facebook chat, only you can smell the other participants.

At our last meeting, the topic was active vs. passive investing. Before we could get into that debate, however, we had to define our terms. I was arguing the passive investing side, which meant I had to come up with a definition of passive investing. This proved to be a lot trickier than I thought, and more fun.

I’m not going to get into the passive vs. active debate in this column. I just want to see if I can figure out what we’re talking about before I wade into that debate in the near future.

“What is passive investing?” may seem like an arcane question that nobody but latte-fueled intellectuals should care about. On the contrary, pal: if you’re saving money for the future, deciding whether to take an active or passive approach is among the most important decisions you’ll make.

Who’s active?

Active investing, as I define it, means trying to beat the market over a particular time period using one or both of the following strategies:

Security selection. This is a fancy term for buying the right stocks (or bonds, or funds, or any other asset) and avoiding the wrong ones. It means having the foresight to buy Apple in the pre-iPod days and not to buy Netflix on the day after its IPO.

Market timing. Markets gyrate. If you can correctly predict those gyrations ahead of time, you can make a lot of money—or avoid losing it.

Passive investing means doing neither of those things. It means diversifying as much as possible by buying broad market index funds. It means owning the next Apple, but also the next Groupon. And it means not trying to time the market. That means staying in when stocks take a dive five days—or months, or years—in a row.

Passive investing also means making portfolio decisions based on personal circumstances, not on headlines or research.

Who’s passive?

With that definition in mind, let’s cook up a couple of hypothetical investors and see who’s passive and who’s active. (Aren’t these terms a little judgmental, by the way? That’s why MintLife columnist Dan Solin likes to refer to passive investing as “smart investing.”) This is my column, so I get to be the judge and jury. We’ll start out easy.

Alice owns a bunch of individual stocks and bonds and trades them regularly.

Verdict:Active.

Bob owns no individual stocks or bonds, only low-cost ETFs, but he trades them regularly in response to perceived market trends.

Verdict: Active.

Charlie buys mutual funds, holds them, and never trades. However, his mutual funds are actively managed, so the fund manager may be trading stocks within Charlie’s funds.

Verdict: Active.

Donna buys diversified index funds or ETFs, holds them, and never trades.

Verdict: Passive.

Rick Ferri, in his book The Power of Passive Investing, puts these four investors into a handy chart, which I’m going to simplify and reproduce here.

Uses actively managed funds or individual stocks Uses index funds or ETFs
Trades Alice Bob
Doesn’t trade Charlie Donna

As you can see, only Donna meets Ferri’s (and my) definition of passive investing.

The hard cases

Now, let’s ask some tougher questions.

Emily owns only index funds and ETFs, but she has decided on a 50% stock/50% bond portfolio.

Verdict: Not enough information.

If Emily has chosen a 50/50 portfolio because it’s in line with her risk tolerance, she’s passive. If she believes this portfolio looks like a winner for the moment but intends to change it later when stocks look like a better bet, she’s active.

Frank owns only index funds and ETFs in a 50/50 stock/bond portfolio, but he trades once a year or more to bring his portfolio back in line with its original allocation. That is, if bonds go up and stocks go down, he sells off some bonds to buy more stocks until he’s back to 50/50. This is called rebalancing.

Verdict: Passive.

Rebalancing is about keeping your portfolio risk under control; it’s not about trying to time the market.

Gene used to have a portfolio of 75% stocks/25% bonds. Recently he received an inheritance. He checked his retirement savings calculator and found that with the new infusion of cash, he could take less stock market risk and still have an excellent chance of reaching his savings goal, so he switched his allocation to 50/50.

Verdict: Passive.

Gene is changing his portfolio based on a change in his circumstances, not anything to do with market trends.

Hailey is a buy/hold/rebalance type like Frank. A couple of years ago, however, during the financial crisis, she noticed that prices on certain bonds had plummeted. She took the opportunity to buy some highly-rated bonds at bargain prices and permanently reduced her allocation to stocks.

Verdict: Hmmm.

I’m not sure. It smells like market timing, but is it?

Get your Team Alice t-shirts here

Alice, our pure active investor, works hard at investing. She is up on the latest IPOs, valuations, interest rates, and market trends. She has a whole folder of investing apps on her phone.

Meanwhile, Frank, our passive buy/hold/rebalance guy, doesn’t know anything about any of that stuff, and he spends a few minutes a year managing his portfolio.

You can probably guess whose team I’m on, but let’s talk about you: are you an Alice or a Frank or someone else from our cast of characters? And why?

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

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By Craig Ford 6 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited March 20, 2014.

Psychologists tell us that the word “free” sets off a mental trigger.

Endorphins are released when you see the word ‘free’.

Yet, ‘free’ also makes us immediately skeptical.

People say ‘free’ is never free.  Free means that you have the opportunity to receive something without cost.

The reality is that nothing is free!  The only question is – who assumes the cost? Nothing is free until someone has first paid for the item.

Reasons To Beware Of “Free”

“Free” is often a marketing word.  Researchers tell us people would rather buy one and get one free than buy two for 50% off.  Any word that becomes a marketing resource is a word that should cause us to pause.  When something free is being offered always stop and ask the question – why would they be offering that product to me for free?

Free might simply mean there is not a dollar requirement, but there might still be a cost.  ‘Free’ can be a terribly inconvenient thing at times.  Free can also be extremely time consuming.  When someone offers you a free product, ask yourself if a cost is involved other than price.

Reflecting on my own experience with’ free’ I think many of us have a fear of free – and rightfully so.  This month I have been offering a free eBook to new and existing subscribers on my site (www.moneyhelpforchristians.com).  I offered that book to my readers ‘free’ in that there was no financial cost to the book.  However, in this case there is a requirement – a subscription to Money Help For Christians.  Furthermore, free to my readers did not necessarily mean free to me – the one who provided the eBook.  When I offered the book free I did not ask readers to cover that cost; I carried it.  This concerned people.  Many were looking for the catch.

In the case of my eBook I was hoping to increase my readership, and so in exchange I was willing to offer a free incentive.  Since my motivation to offer the product free was known, you could proceed with confidence.  Once you determine why someone would offer the product for free, you can evaluate its worth. If, however, you cannot figure out why it would be offered free, it is quite possible something else is happening that you are unaware of.  Avoid unexplainable offers of free.

Free – Consumer Implications:

As a consumer you need to remember that nothing is free!  When something is offered ‘free’ it simply means the provider is assuming the cost.  Typically, there is a valid reason for this. When you get a better deal, you spend more.

Just because something is ‘free’ does not mean it is better or even cheaper for you.  Many organizations offer a free month or two for a subscription based product because they know most people will be too lazy to cancel their subscription after those free months.  Remember, free is a marketing word.

Free – Ethical Implications:

While remembering that nothing is truly free, we should recognize that anything you take for free is coming out of someone else’s pocket.

Consider the the following example.  You check out of the store and when you are unloading the groceries you realize that you unintentionally didn’t pay for an item.  At this moment that item is ‘free’ to you, but the store has now assumed that cost.  This is why it is important to pay for the product as you now have the product.  Theft is a means by which some people get items free.  However, a price has been paid – honesty, trustworthiness, and integrity were all sacrificed.  As a result, the cost is assumed by the store owner instead of the customer.

How about another seemingly silly example?  When you eat at a fast food place and you load up your bag with 50 ketchup packets so you can use them at home for ‘free’, you need to remember that all you are doing is transferring the ketchup bill from yourself to the restaurant.  The ketchup is not really free – you just didn’t pay for it. In this case you essentially determined it would be more appropriate for another to pay for the item so you could have it for free.

We should only accept free products when they are offered.

Free – Christian Implications:

and are justified freely by his grace through the redemption that came by Christ Jesus. (Romans 3:24 NIV)

As I read the Christian story I notice and embrace the importance of our freedom from the unrelenting forces of evil.  On the one hand, the grace offered to us is free – we pay no price for our salvation.  However, ultimately one cannot speak of forgiveness as a free product since a terribly substantial price was paid for forgiveness.

The beauty of forgiveness is not that it comes without a price, but that the price was not passed along to us.  God assumed the cost. Though not ultimately liable nor responsible for the price, Jesus assumes it and pays it.

I, for one, am extremely thankful for God’s free gift of his son – Jesus Christ.

What good or bad experiences have you had with “free”?

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Source: biblemoneymatters.com

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Last Updated on February 25, 2022 by Mark Ferguson

The 50 percent rule is one way to estimate expenses on rental properties. The 50 percent rule states that the expenses on a rental property will be 50 percent of the rents. The 50 percent rule does not account for any mortgage expenses. One of the biggest mistakes new rental property owners make is underestimating the expenses on rental properties.

This rule is widely used on many online forums and by many investors, but I do not think it is something that should be used by all landlords on every property. I personally do not like rules that assume all properties are the same and perform the same. I prefer to run the numbers on each property to make sure everything is accounted for and the potential returns are as accurate as possible.

How is the 50% rule used to estimate expenses on rental properties?

The 50 percent rule states the expenses (not including mortgages expense) on a rental will be 50 percent of the rent.

Many investors use this rule to judge the profitability on a rental and only this rule. However, I think using a blanket rule like this is not the best way to analyze a rental property. I also do not like the 1% rule. Here is an example of what the 50 percent rule would say the expenses are on one of my properties.

Rental property number 4

Rent:                          $1,600 a month

Expenses:                  $800

Mortgage payment: $740 (without taxes and insurance)

According to the 50 percent rule I make about $60 a month on this property. However, I make much more than that. If I were to use my cash flow calculator, it shows I am making over $350 a month on this property. What is the difference? On the cash flow calculator, it figures all of the expenses, it does not use a blanket rule. Here are the expenses on this property using my calculator:

Property Management: $128

Taxes:                                $83

Insurance:                        $50

Maintenance:                  $160

Vacancies:                        $80

Total:                               $501 a month

The difference between my estimates and the 50 percent rule is $300 a month or $3,600 a year. Are my expenses really this low or am I just making stuff up? I did an analysis of my rentals last year and my expenses were almost exactly what I had estimated them to be. I have had rental properties since 2010 and my estimated expenses have been very close to what the actual expenses have been. This was not just a one-year anomaly.

To avoid tenant problems proper screening is vitally important and we now use SmartMove for credit and background checks.

Why does the 50% rule show the expenses are so much higher than what they actually are?

There are a number of factors why I do not like the 50 percent rule and I think it can overestimate the expenses on rentals. The biggest reason I do not like the rule, is it assumes all rentals will have basically the same expenses in every state and on every type of property.

  • Property Taxes: The property taxes in every state can vary by a huge amount. In Colorado, my taxes are less than $1,000 a year on most of my properties. In other states, those same properties would have taxes five times that amount. The difference in expenses on taxes: $80 a month versus $400 a month. 
  • HOA dues: If you own a condo or townhome the chances are you have HOA dues. Many single-family homes have them as well. I have one rental with an HOA and the rest have no HOA fees. Some HOAs can charge hundreds of dollars a month. The difference in HOA expenses: $0 versus $200 a month.
  • Vacancies: Different types of properties have different vacancy rates and so do different towns. In Colorado, we have had extremely low vacancy rates. In some cases and years, the vacancies have been under 1 percent. In other parts of the country, the vacancy rate is over 10 percent. Single-family homes typically have lower vacancies than multifamily homes. College rentals will have much higher vacancies than other types of rentals as well. Some properties may have 5 percent vacancies expenses and others may have 15 percent or higher. The difference in vacancy expenses: $80 a month versus $240 a month. 
  • Maintenance: Properties will need work, even if they are brand new. The amount of work will vary on the condition of the property and the type of property as well. Multifamily usually has more wear and tear than single-family and college rentals can have much more wear and tear. The older a property is, the more maintenance it will require. The worse shape a property is in, the more maintenance it will require. The maintenance expense can vary from 5 to 20 percent as well. The difference in maintenance expense: $80 versus $320 a month.

There are other expenses that will make a huge difference as well like insurance. If the property is in a flood or hurricane zone it will have much higher insurance. As you can see the expenses on similarly priced rentals, that may cater to different tenants, in different areas of the country can vary from $400 (once you add insurance and property manager) a month to $1,160 a month! If we took the same $1,600 in rent that I am getting on rental property number 4. My expenses could be 25 percent of the rent or over 70 percent of the rent. These are extreme examples of what the expenses may be on rentals, but they show how different properties will have much different costs.

What other reasons make the 50% rule inaccurate?

Another problem with the 50 percent rule is it uses the rent to determine the expenses. When I bought my fourth rental property in 2012, it rented for $1,300 a month. The rents have gone up over the last three years to $1,600 a month and it may rent for more than that if I were to get a new tenant. Look at how much the expenses changed because my rent increased.

  • With $1,300 a month in rent, the 50 percent rule says my expenses are $650 a month
  • With $1,600 a month in rent, the 50 percent rule says my expenses are $800 a month.

Did my expenses really go up by $150 a month because the rent is higher? It could be argued that because the rent is higher my vacancy expenses would be higher because when a month’s rent is missed I would lose more money. I agree with that but here is how much my vacancy costs would increase using different vacancy rates.

  • 5 percent vacancy: Expense would increase from $65 to $80 a month
  • 10 percent vacancy: Expense would increase from $130 to $160 a month
  • 15 percent vacancy: Expense would increase from $185 to $240 a month

Even with 15 percent of the rents accounting for vacancies the increase would only be $75 a month, not $150 a month. With a 5 percent vacancy allowance, the extra cost is only $15 a month. Maybe the other expenses would be higher with the higher rent? My property taxes have gone up slightly, but less than $10 a month, my insurance has not increased, my maintenance has not increased, but my property management has. If we look at property management the increase is about $22 a month. On certain properties it possible that the expenses would increase $150 a month when the rent changes if many other things change as well. It is also possible that the expenses would not change much at all, which is the problem with the 50 percent rule. It is a blanket rule that does not account for the different expenses that different properties will have.

Conclusion

The 50 percent rule might be dead on for some properties, but for other properties, it could be hundreds of dollars a month off. This is why you cannot rely on a blanket rule to figure the expenses. You need to write everything out or you can use a cash flow calculator to help you know what all the expenses are. Knowing the exact expenses will make you a better investor and help you figure out what is and is not a good rental property.

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Source: investfourmore.com